Legislature(2009 - 2010)SENATE FINANCE 532
02/15/2010 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB269 | |
| SB270 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 269 | TELECONFERENCED | |
| + | SB 270 | TELECONFERENCED | |
SENATE FINANCE COMMITTEE
February 15, 2010
9:03 a.m.
9:03:12 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee meeting
to order at 9:03 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Donny Olson
Senator Joe Thomas
MEMBERS ABSENT
None
ALSO PRESENT
Deven Mitchell, Executive Director, Alaska Municipal Bond
Bank Authority, Department of Revenue; Ted Leonard,
Executive Director, Alaska Industrial Development and Export
Authority; Bryan Butcher, Director, Government Affairs and
Public Relations, Alaska Housing Finance Corporation,
Department Of Revenue; Joe Dubler, Director of Finance,
Alaska Housing Finance Corporation
PRESENT VIA TELECONFERENCE
None
SUMMARY
SB 269 ECON. STIMULUS BONDS: REALLOCATION/WAIVER
SB 269 was HEARD and HELD in Committee for
further consideration.
SB 270 AK HOUSING FIN CORP DIVIDEND
SB 270 was HEARD and HELD in Committee for
further consideration.
9:03:21 AM
SENATE BILL NO. 269
"An Act relating to the waiver of volume cap of
recovery zone economic development bonds authorized by
26 U.S.C. 1400U-2 and reallocation by the Alaska
Municipal Bond Bank Authority of the waived volume
cap; relating to the waiver of volume cap of recovery
zone facility bonds authorized by 26 U.S.C. 1400U-3
and reallocation by the Alaska Industrial Development
and Export Authority of the waived volume cap;
increasing the total amount of bonds and notes that
the Alaska Municipal Bond Bank Authority may have
outstanding; relating to revenue bonds issued by the
Alaska Municipal Bond Bank Authority; and providing
for an effective date."
9:03:45 AM
Co-Chair Stedman brought the meeting to order and thanked
participants for coming on a holiday. He went over today's
schedule.
9:04:56 AM
DEVEN MITCHELL, EXECUTIVE DIRECTOR, ALASKA MUNICIPAL BOND
BANK AUTHORITY, DEPARTMENT OF REVENUE, explained the
different issues in the bill. The first issue deals with the
Alaska Municipal Bond Bank Authority and the need for
statutory revisions in the program and the second issue
deals with temporary opportunities related to the recovery
act. He introduced the PowerPoint presentation, Alaska
Municipal Bond Bank, Alaska Industrial & Export Authority,
February 15, 2010 (copy on file).
Mr. Mitchell reviewed the Alaska Municipal Bond Bank, page
2, which is a public corporation of the state of Alaska
created in 1975 to provide access to capital markets for
Alaska communities through the use of state support. The
summary statistics from FY2001 through FY2009 are presented
with community's savings in the amount the communities would
have otherwise had to pay in addition to their original
obligation payments. He indicated that there are benefits to
Alaska communities from the program. Mr. Mitchell moved to
the Bank Statute Changes, page 3 showing the bond bank
increase borrowing limit by $250 million. He noted there is
a $750 million cap increase from $500 million about four
years ago. He noted that as of June 30, $162.8 million of
the cap remains. There are applications for another $40
million with additional applications expected to total $100
million.
Co-Chair Stedman referred to the list of outstanding loan
amounts for communities around the state totaling $564
million. He requested a time frame when the communities will
pay off this debt. He mentioned that the city of Sitka's $34
million loan will be paid off in seven years and wondered if
there would be the authority to reuse the money on other
projects.
Mr. Mitchell replied that it is a revolving authority that
exists under the borrowing cap. He commented that the
program is mature at this point meaning the debt is level
and will continually step down to a zero balance in thirty
years. The borrowing of the communities has outpaced the
maturity of the outstanding obligations.
Co-Chair Stedman requested additional information showing
how the authorization will step down to give the committee a
better understanding of the incremental increase to $250
million and how much room will be out in five to ten years.
Mr. Mitchell agreed that could be done. Co-Chair Stedman
also asked for the cost of the debt to the communities.
Mr. Mitchell agreed he could put together a schedule showing
the aggregate debt services by community showing how the
maturity looks over time. Mr. Mitchell continued that in
addition to increasing the borrowing limit, the statute
eliminates restrictions on Revenue Bond issues of the
program and eliminates restrictions on leases of the
program. These changes are requested by communities that
currently have opportunities to finance capital projects. If
the bond bank were not available the communities would have
to borrow at higher interest rates. He referred to the Sitka
hydro project that is looking to refinance about $21 million
worth of bonds. The refunding can benefit in gross dollars
of $1.7 million by the bond bank participating in the
transaction.
Co-Chair Stedman explained that the community of Sitka wants
to refinance an old hydro project, lower the debt service,
and use the savings to pay additional debt service for the
next increment of raising a dam face. The local electrical
rates will not change.
Senator Olson questioned what was the anticipated default
expected over the next ten to fifteen years in looking at
the increased borrowing rate. Mr. Mitchell expected a zero
default. He reported that the program is not a grant
program, but a loan program. He declared that in the history
of the bond bank there has never been a default where a
community has not paid. The intent of the program is to
provide lower costs to the communities that need it the
most.
Senator Olson asked if all the communities on page 2 were
into revenue bonds or other types of bonds. Mr. Mitchell
responded that the bonds were primarily general obligation
and revenue. Senator Olson asked for the breakdown of the
bonds. Mr. Mitchell responded that there were more general
obligation bonds than revenue bonds.
9:15:38 AM
Mr. Mitchell continued his presentation with the History and
Applicable Laws for Recovery Zone Bonds, page 4. He
explained that the American Recovery and Reinvestment Act of
2009 created opportunities to provide the incentives for
both public and private partnerships, but within a limited
window. After the end of the calendar year, the allocations
will no longer be available for use.
Mr. Mitchell continued with the Build America Bonds, page 5.
He remarked this is a structure of financing available for
any tax exempt financing. Where otherwise they would sell
tax exempt bonds, now would sell taxable bonds where the
federal government provides a 35 percent subsidy on the
interest expense on those bonds. He informed the committee
there may be an extension to the program, but at a lower
subsidy rate. He moved to the Recovery Zone Bonds, page 6.
He mentioned that the economic development bonds are
identical to the Building American Bonds except it boosted a
45 percent subsidy on the interest expense. This
significantly increases the value on the long end of the
loan. He informed that $90 million has been allocated to the
state of Alaska. Mr. Mitchell explained that the recovery
zone facility bonds provide the opportunity for
municipalities to offer tax exempt financing to businesses
investing in their communities. He stated that $135 million
has been allocated the state of Alaska.
9:19:09 AM
Mr. Mitchell observed that the Recovery Zone, page 7 is for
a community that declares itself a recovery zone with a
required resolution from the local city council.
TED LEONARD, EXECUTIVE DIRECTOR, ALASKA INDUSTRIAL
DEVELOPMENT AND EXPORT AUTHORITY, explained that the
original recovery zones were allocated by the U.S. Treasury
based on June 2008 employment declines. The U.S. Treasury
looked at employment populations in cities and counties, but
in the unorganized areas of Alaska the census area was used
to allocate the portion.
Mr. Mitchell referred to the Recovery Zone Allocations on
page 8. The economic development bond total is $90 million
with facility bonds at $135 million based on the employment
statistics.
Co-Chair Stedman asked for more information on why the
Yukon-Koyukuk Census Area and the Wade Hampton Census areas
were zero.
Mr. Mitchell responded that those areas did not have a
decline in employment statistics for the qualifying period.
He referred to page 9, Why Legislation? to explain the
disconnect between allocations and potential projects. The
failure to use the allocation money will result in a loss of
funds on January 1, 2011. He explained that current
allocations will guarantee the loss of a substantial volume
cap. This bill establishes a framework and legal basis to
ensure this limited resource is used.
Mr. Mitchell referred to the Alaska Municipal Bond Bank
Recovery Zone Statutes on page 10 providing for communities
in census areas to receive consideration immediately upon
the bill becoming effective. It provides for boroughs to
waive allocations that are not needed or cannot be used
immediately.
Co-Chair Stedman elaborated with an example on page 8 of
Prince of Wales-Outer Ketchikan Census Area for $1.9 million
in economic development bonds and $2.9 million in facility
bonds. He asked for an explanation on how the mechanism
would work.
9:25:23 AM
Mr. Mitchell responded that upon the bill's passage there
would be an immediate outreach to census communities
querying if there were any planned capital projects. Based
on the response an allocation would be made to those
communities with projects. He explained that if a borough
has not used the allocation then it will be waived
automatically so it can be refocused to other community
projects. There is the concern that areas of increased
unemployment would be penalized, but he reiterated that
although this is not the intent of the bill it would be
allowed to make sure allocations are used.
9:28:38 AM
Mr. Leonard remarked that the Alaska Industrial Development
and Export Authority Recovery Zone Facility Bonds on page 11
are specifically designed to be used with businesses in
conjunction with banks. This can be used for industrial,
commercial, retail, and office. Facility bonds cannot be
used for rental housing, airplanes, health clubs, liquor
stores, race tracks, luxury boxes, gambling facilities, or
massage parlors. There is one allocation of $29 million by
the Fairbanks North Star Borough to the Alaska Port
Authority for the natural gas project.
Co-Chair Stedman asked if these would be available for
community fishing quotas. Mr. Leonard responded he was not
sure, but noted it does not say it cannot be used for that.
Co-Chair Stedman restated it would be used for fishing
permits not the equipment. He added there has been
discussion of using funds to help some communities buy
community quotas to create jobs.
Senator Thomas inquired where this is addressed in the bill.
Mr. Leonard specified that it is in the federal statutes.
Mr. Leonard continued on page 12 with the Features and Uses.
The bonds are issued for private projects with the interest
tax-exempt. These bonds would be issued as a conduit private
activity bond and the debt service is funded by the private
business that owns and uses the property.
9:32:43 AM
Mr. Leonard continued with the Recovery Zone Regulations on
page 13 with the goal of ensuring all the allocations would
be used in recovery zones and areas of high unemployment and
economic distress. One of the benefits of the bill is that
it allows AIDEA and the bond bank to work with other
entities not in the recovery zone.
9:33:40 AM
Senator Huggins inquired if Alaska could have state-wide
projects. Mr. Leonard replied that the area would have to be
designated as a recovery zone. The criteria must be logical
and make sense.
Senator Huggins voiced his concern if this will make sense
later on. Mr. Leonard responded that was a concern of AIDEA
who wanted to be a participant in order to look at the state
as a whole. Based on the criteria and public hearing
process, it should have the mechanism on why the decisions
were made.
9:36:03 AM
Senator Huggins questioned if that did not happen, what was
Mr. Leonard's confidence level in the mechanism to make this
work.
Mr. Leonard responded that if it does not happen then AIDEA
estimates there will be a 50 per cent loss of the cap. He
added that almost every state has a reallocation process. He
noted that the first thing is to be sure that each project
meets the qualifications to be a project. Businesses can not
just ask for money without a firm and verified project that
meets requirements for unemployment. He emphasized that
there are processes in place to verify that the project is
feasible in the area and meets the criteria for unemployment
or distress and also has the resources to monitor it.
Regulations could also state that if it is not being used by
a certain date then it could be pulled back. AIDEA is hoping
to have a list of projects so that if allocations are not
used, then another project could be brought forth to use the
allocation.
Co-Chair Stedman questioned if the allocations not used in
the unorganized areas would flow into Anchorage and Matsu.
Mr. Leonard replied that it could. Co-Chair Stedman believed
that it would most likely flow to areas with the structure
to handle the project, but did not meet the federal
criteria. Mr. Leonard agreed that specific areas within a
larger metropolitan area could be looked at as distressed.
9:38:56 AM
Co-Chair Stedman referred to the Department of Commerce zero
fiscal note and an $80,000 fiscal note from the Department
of Revenue and the Alaska Municipal Bond Bank for legal
counsel, financial advisory service, and travel.
SB 269 was HEARD and HELD in Committee for further
consideration.
9:40:10 AM AT EASE
9:41:13 AM RECONVENED
9:41:23 AM
SENATE BILL NO. 270
"An Act relating to the dividend paid to the state by
the Alaska Housing Finance Corporation; and providing
for an effective date."
BRYAN BUTCHER, DIRECTOR, GOVERNMENT AFFAIRS AND PUBLIC
RELATIONS, ALASKA HOUSING FINANCE CORPORATION, DEPARTMENT OF
REVENUE, explained that sponsor statement.
SPONSOR STATEMENT
Senate Bill 270 will modify the Alaska Housing Finance
Corporation's transfer plan statutes to reflect federal
changes in generally accepted accounting principles.
House Bill 256 passed in 2003 that set in statute a
transfer plan for AHFC to pay an annual dividend to the
state of Alaska. The yearly dividend would be lesser of
$103 million or 75 percent of the Corporation's net
income for the previously completed fiscal year minus
bond repayments for state capital projects.
In 2006, Senate Bill 236 passed that made the first
adjustments to the transfer plan. This bill changed the
definition of "net income" to "adjusted change in net
assets", which reflected federal changes to generally
accepted accounting principles.
SB 270 will make another modification due to federal
changes in generally accepted accounting principles. It
will add to the definition of "adjusted change in net
assets" to include "temporary market value adjustments to
assets and liabilities made during the base fiscal year".
This change will allow for a true dollar figure for the
Corporation's dividend to be calculated from rather than
inaccurately high or low numbers based on how interest
rate swaps are now considered.
Co-Chair Stedman asked for an explanation of the interest
rate swap.
JOE DUBLER, DIRECTOR OF FINANCE, ALASKA HOUSING FINANCE
CORPORATION, explained that an interest rate swap is a
derivative financial instrument where the corporation enters
into a contract with a counter party where they are paid a
fixed rate in exchange for a variable rate. The variable
rate is based on an index. This allows for the selling of
variable rate bonds to hedge the change of interest rates
over the 30 year time period bonds are typically sold. The
Alaska Housing Finance Corporation has lowered the costs of
funds by entering these interest swaps.
Mr. Butcher remarked that SB 270 is a simple bill. Co-Chair
Stedman inquired if there have been any problems collecting
on the swaps. Mr. Dubler responded that currently the swaps
are marked to market every quarter for financial statement
presentation. If the swap out was closed today than it would
require a payment to the counter party.
Senator Olson asked who would want an interest rate switch
in light of the low interest rates on the world market. Mr.
Dubler answered that these swaps were entered into in 2001
through 2006 when the corporation saw the majority of the
mortgage activity was from home buyers. The mortgage market
started offering very sophisticated loan products to all
borrowers that caused the Alaska Housing Finance Corporation
concern. The corporation decided to take on the risk
themselves because they had the expertise to take on these
types of transactions and pass the benefit to the borrowers
in the form of a lower interest rate. Most for-profit
corporations enter into some sort of interest rate hedge.
9:49:27 AM
Co-Chair Stedman remarked that many parties were caught by
surprise by the derivative market. Mr. Butcher remarked that
the corporation had three swaps with Lehman Brothers, but
when Lehman Brothers went bankrupt, the corporation wrote
them a check to purchase out of the position. The three
swaps were rebid and several million dollars were made in
the transaction.
9:50:38 AM
Co-Chair Stedman reported a zero fiscal note from the
Department of Revenue.
Senator Thomas asked if this was being made during base
fiscal year or on an annual basis.
Mr. Butcher responded that the adjustments are made
annually. This makes an adjustment from the financial
statements to what was originally agreed to in the transfer
plan. Accounts have made a lot of changes over the years
that have affected the agreement with the legislature over
what the dividend would be on an annual basis. The general
accounting principals have been modified to require the
corporation to include changes in the market value of
certain interest rate swaps. This was not part of the
original deal with the legislature. SB 270 asks to back this
modification out.
Senator Thomas inquired if it would be broader with the
changes.
Mr. Butcher explained there was another motivation from 1997
that required the corporation to bring booking marketable
debts securities to market. The change was immaterial to the
corporation's financial statements. The swap situation could
have large swings in value from quarter to quarter and the
corporation did not want a $10 million net increase in one
year affecting the dividend, then maybe a $10 million
decrease for the following year also affecting the dividend.
9:53:53 AM
Co-Chair Stedman questioned the corporation's intention of
going forward with derivatives.
Mr. Butcher responded that they would not be entering into
any more in the near future. The corporation's debt issuance
for this calendar year will consist mainly of some federal
bonds through 2010.
Co-Chair Stedman questioned the reason for not doing it
anymore. Mr. Butcher replied that the interest rate swaps
entered to date have been swaps that change a variable rate
debt into a fixed rate obligation of the corporation. The
variable rate debt market in the world has had some issues
with liquidity in the past year and a half. There have been
a lot of bond holders putting the bonds back into the
corporation and they have had to come up with the cash to
pay off their position. The variable rate interest rate
today is almost non-existent due to the shortage of
liquidity.
Co-Chair Stedman asked if these are standardized or non-
standardized contracts. Mr. Butcher remarked that the
general terms are standardized, but each firm has their own
way of doing business. Co-Chair Stedman asked Mr. Butcher to
explain the difference between a standardized and non-
standardized contract.
9:57:04 AM
Mr. Butcher explained that the liquidity facilities are an
agreement where the provider supplies liquidity for a
variable rate debt obligation. Bond holders have the right
every seven days to put the bonds back into the corporation;
therefore the corporation must have the money to pay those
bonds off. Since the corporation does not usually have that
large a sum of money available an agreement is entered into
with a bank to provide liquidity in case a bond holder wants
their money. There are then further agreements between the
corporation and the bank.
9:59:22 AM
Co-Chair Stedman understood the standardization, but the
transparency was not as apparent as many thought hence the
world financial situation. The state of Alaska did not get
hit as bad as many areas in the country, but comfort levels
are still not high.
SB270 was HEARD and HELD in Committee for further
consideration.
ADJOURNMENT
The meeting was adjourned at 10:02 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB 270 AHFC Transfer Plan Sectional Analysis.pdf |
SFIN 2/15/2010 9:00:00 AM |
SB 270 |
| SB 270 AHFC transfer plan Sponsor Statement.pdf |
SFIN 2/15/2010 9:00:00 AM |
SB 270 |
| bondbank09annualreport.pdf |
SFIN 2/15/2010 9:00:00 AM |
SB 269 |
| February 15 2010wAIDEA_Presentation.ppt |
SFIN 2/15/2010 9:00:00 AM |
SB 269 |
| Agenda 021510.docx |
SFIN 2/15/2010 9:00:00 AM |